Morgan Stanley called eurobonds issued in El Salvador at their current price levels a buying opportunity in part because of the recent cryptocurrency slump that has affected the value of the country’s bitcoin holdings. Despite its severe debt, the government could continue to “entangle[ing] through” for at least a year while continuing to meet its bond payments, the investment bank said.
Bad scenarios have a price
In the midst of one of the worst bear markets in crypto history, the first country to take Bitcoin as its legal tender has fallen into severe financial difficulties. El Salvador’s financial difficulty is showing in falling bond prices, partly attributed to its exposure to the main cryptocurrency. For context, the country’s 2027 bond has plunged 32 cents on the dollar to 28 cents this year, hitting a record low of 26.3 cents last Friday, Bloomberg noted.
The immediate stress ahead of El Salvador President Nayib Bukele is obtaining $800 million for a bond payment due January 2023. With his benchmark bonds due 2032 yielding 24%, bond prices its bonds have fallen in line with other struggling economies like Ukraine, Argentina, etc.
Simon Waever, Morgan Stanley’s global head of emerging markets sovereign credit strategy, takes a relatively optimistic view of El Salvador’s economic outlook and says the country is unlikely to be headed for default amid global liquidity. More strict. According to his estimates, the 2027 bond should be priced at 43.7 cents on the dollar.
“Markets are clearly pricing in a high probability autarky scenario in which El Salvador defaults, but there is no restructuring.”
The generally negative sentiment about the country’s prospects is reportedly related to Bukele’s policy change, ranging from adopting Bitcoin as legal tender to announcing the launch of BTC bonds. Despite the asset’s recent rally, its value has plummeted more than 50% since El Salvador made its first purchase in September last year.
The IMF was particularly unhappy with Bukele’s pro-cryptocurrency stance, urging the country to reverse its adoption and arguing that the move was posing significant risks to financial stability.
Bitcoin Bonuses Repeatedly Delayed
When the government of El Salvador announced the plan to issue $1 billion in Bitcoin-backed bonds in November last year, its goal was to generate some cash for its struggling economy. Proceeds received from the bonds will go towards supporting the much-hyped “Bitcoin city”, as CryptoPotato previously reported.
Given the current bearish market condition, the government has postponed the launch several times in recent months, as the high volatility of Bitcoin could exacerbate the country’s debt problem.
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